Averting a Fiscal Crisis

Why America Needs Comprehensive Fiscal Reforms Now

Deficit Projections
(Percent of GDP)
12%
1990-2012 Average Deficit: 3.1%

10% 8% 6% 4% 2% 0% -2%

2012-2022 Average Current Policy Deficit: 5.0%

Likely Deficits

Current Law

-4%

Note: Estimates based on CBO, Alternative Fiscal Scenario.

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Gap Between Revenue and Spending

(Percent of GDP)
26%

Avg. Historical Spending (1972-2011): 21%

24% 22% 20% 18% 16%

14%
Avg. Historical Revenues (1972-2011): 18% 12% 10%

Current Law Spending

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Current Law Revenues

AFS Spending

AFS Revenues

Surpluses Turning Into Growing Deficits

Spending and Revenues (Billions of Dollars)

$860B

Interest Deficit

$1.4T

Surplus

$220B

Interest Deficit
$1.1T $5.1T

$236B $233B $1.6T

What Debt Is Likely to Reach Primary

Spending

Revenues

$4.6T

Interest
Primary Spending Revenues

$3.3T $2.0T

Primary Spending

$2.4T

Revenues

2000
Source: Congressional Budget Office, Alternative Fiscal Scenario
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2012

2022

Interest Costs Will Reach $1 Trillion By 2024

Components of Revenue and Spending

Revenues and Financing Outlays

Interest 6% Borrowing 32% Non-Defense 15%

Medicare 14% Medicaid & Other Health 8%

Individual Income Tax 27%

2012
Defense 19% Social Security 22%

Other 6% Social Insurance Taxes 24%

Corporate Tax 5%

Other Mandatory 16%

Total Revenues = $2.435 Trillion Total Financing = $1.128 Trillion

Total Outlays = $3.563 Trillion

Debt Projections

*Projections based on CRFB calculations of CBO Alternative Fiscal Scenario. Generally assumes current law, with the following exceptions: all expiring income and estate tax cuts and AMT patches are extended, scheduled cuts to Medicare physicians are waived, scheduled sequester cuts are waived, revenues and non-entitlement spending grow at the same rate as the economy after 2022, and cost saving measures from Affordable Care Act are only partially successful over the long-term.
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Growing Entitlement Spending

(Percent of GDP)
25%

Actual
20%

Projected

15%

Historical Revenue Level

10%

5%

0% 1972 1982 1992 2002 2012 2022 2032 2042 2052 2062 Revenue 2072 2082 Social Security Health Care Other Entitlements

Consequences of Debt
Crowding Out of private sector
investment, leading to slower economic growth

Higher Interest Payments displacing other

government priorities and investments

Intergenerational Inequity as future

generations pay for current government spending

Unsustainable Promises of high spending

and low taxes

Uncertain Environment for businesses to

invest and households to plan

Eventual Fiscal Crisis if changes are not

made
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The Risk of Fiscal Crisis

Rising Debt increases the likelihood of a fiscal crisis during which investors would lose confidence in the government's ability to manage its budget and the government would lose its ability to borrow at affordable rates.
-Doug Elmendorf, Director of the Congressional Budget Office

Our national debt is our biggest national security threat.

-Admiral Mike Mullen (ret.), Chairman of the Joint Chiefs of Staff

One way or another, fiscal adjustments to stabilize the federal budget must occur *if we dont act in advance+ the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.
-Ben Bernanke, Chairman of the Federal Reserve

Debt Drivers
Short-Term Long-Term

Economic Crisis
(lost revenue and increased spending on safety net programs like Food Stamps)

Rapid Health Care Cost Growth

(causing Medicare and Medicaid costs to rise)

Economic Response
(stimulus spending/tax breaks and financial sector rescue policies)

Population Aging
(causing Social Security and Medicare costs to rise, and revenues to fall)

Tax Cuts
(in 2001, 2003, and 2010)

Growing Interest Costs

(from continued debt accumulation)

War Spending
(in Iraq and Afghanistan)

Insufficient Revenue

What the Debt Will Realistically Look Like

(to meet the costs of funding government)

Growing Entitlement Spending

Federal Spending and Revenues (Percent of GDP)
80% Actual 70% 60% 50% 40% 30% 20% 10% 0% Health Care Social Security Other Spending Revenues Interest Projected

Note: Estimates based on CBO, Alternative Fiscal Scenario.

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Why Is Federal Health Spending Increasing?

The Population Is Aging due to increased life
expectancy and retirement of the baby boom generation, adding more beneficiaries to Medicare and Medicaid

Per Beneficiary Costs Are Growing faster than the

economy in both the public and private sector. Causes of this excess cost growth include:
Americans Are Unhealthy when compared to
populations in similar economies

Americans Are Wealthy and Willing to Pay More

Fragmentation and Complexity among insurers,
providers, and consumers make normal market competition difficult

Incentives Are Backwards by hiding true costs of care

through insurance and by hiding costs of insurance enrollment through employer sponsorship, incentivizing overspending
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Health Care Spending by Country

Percent of GDP (2008)
18% 16% 14%

12%
10% 8% 6% 4% 2% 0%

36% 64%

Public

Private

Source: 2008 Data from the Organization for Economic Cooperation and Development.
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Number of Workers for Every Social Security Retiree is Falling

1950 1960 2012 2035

36%

16:1

5:1

64%

3:1

2:1

Source: 2012 Social Security Trustees Report.

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Living Longer, Retiring Earlier

85 80 75 70 65 60 55 50 45
Normal Retirement Age Average Age of Retirement Early Retirement Age 5 year gap 13 year gap Average Life Expectancy

Source: Social Security Administration, U.S. Census Bureau, and OECD. Figures show data for males.
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Looming Social Security Insolvency

Social Security Costs and Revenues (Percent of GDP)
7% Payable Benefits 6% Scheduled Benefits

5%

4% Revenues 3%

2%

Source: 2012 Social Security Trustees Report.

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Interest as a Share of the Budget

(Percent of GDP)
2010 2030 2050

Primary Spending 94%

Interest 6%

Primary Spending 79%

Interest 21%

Primary Spending 63%

Interest 37%

Total Spending = 24% of GDP

Total Spending = 32% of GDP

Total Spending = 44% of GDP

Note: Estimates based on CBO, Alternative Fiscal Scenario.

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Insufficient Revenue
Unpaid for Tax Cuts in 2001, 2003, and
2010 lowered revenue collection without making corresponding spending cuts or tax increases to offset the budgetary effect

Spending in the Tax Code Costs Over $1

Trillion annually in lost revenues through so called "tax expenditures," which make the tax code more complicated, less efficient, and force higher rates

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Excessive Spending Through the Tax Code (Tax Expenditures)

TaxIn order to stabilize Debtof Primary the economy by 2021: Expenditures Expenditures as a Percent at 60% of Large Tax Spending if Included in the Budget and Their 2011 Costs (billions)

Employer Health Insurance Exclusion

Defense Discretionary 15%

$110 $91 $78 $60 $60 $56 $30

Tax Expenditures 24%

Special Rates on Dividends and Capital Gains Mortgage Interest Deduction 401(k)s and IRAs Earned Income Tax Credit

Non-Defense Discretionary 14% Health Spending 17% Social Secutity 16% Other Mandatory 12%

Child Tax Credit Charitable Deduction

Source: Joint Committee on Taxation.

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Corporate Tax Rates by Country

Average Effective Rate 45% 40% 35%

Marginal Rate

30%
25% 20% 15% 10% 5% 0%

Note: Estimates based on 2010 data from the OECD and AEI.
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How Much Do We Need to Save?

In order to stabilize debt at 60% or 70% of the economy by 2022:
(2013-2022 Savings) Current Law Baseline Debt in 2022 w/ No Savings (% GDP) Current Policy Current Policy Baseline Assuming Baseline Assuming Upper-Income Tax All Tax Cuts Cuts Expire* Continued* 77% 81%

58%

Required Savings to Stabilize Debt at 70%

Required Savings to Stabilize Debt at 60%

n/a

$1.7 Trillion

$2.8 Trillion

n/a

$4.2 Trillion

$5.3 Trillion

*Estimates based on current policy baseline (2001/2003/2010 tax cuts extended, AMT patched, doc fixes, war costs decline, and sequester waived.
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Setting the Record Straight

To put debt on a downward path toward safe levels, we need at least $4 trillion in savings this decade.
We can't CUT our way out
Eliminating Congressional salaries, foreign aid, and earmarks would reduce the deficit by only
4%. Balancing the budget through spending cuts alone would require cutting all spending by a third.

We cant TAX our way out

To fix the debt by increasing tax rates on EVERYONE, the bottom rate would have to rise from 10% to 16% and the top rate from 35% to 55%. To fix the debt by taxing families making over $250,000, the top rate would have to exceed 100%*.

We cant GROW our way out

Faster growth means more revenue, but also higher spending on entitlement programs. Fixing the debt with growth alone would require record-high growth rates every year.

We Need a Comprehensive Solution That Cuts Wasteful Spending, Reforms Entitlement Programs, and Raises Revenues
*Data from the Tax Policy Center.
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We Cant Inflate or Grow Our Way Out

Inflation
An unexpected increase in inflation
could temporarily reduce the real value of debt and federal interest payments to investors

Growth
Strong economic growth is a necessary
but not sufficient condition for debt reduction

Many spending programs grow as the

economy does, and would outpace revenue growth

However, higher inflation would prompt

investors to demand higher interest payments, increasing the costs of financing new debt

Social Security payments would

increase as wages and, thus, benefits grew over time

Higher inflation would also push up

spending for all inflation-indexed programs, including Social Security, food stamps, military pensions, veterans benefits.

Health care spending would grow

even faster, given that costs continually grow notably faster than the overall economy

The levels of growth needed to

significantly reduce medium-term debts would be way above historical norms
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The Benefits of Debt Reduction Done Right

Income per Person
$65K

$60K

The average person will earn $9,000 a year less if we dont fix the debt.

Stronger Economy
$9K

Higher wages and faster economic growth down the road

$55K

Improved Confidence and

Certainty about the Future More hiring and investment

$50K

Lower Interest Rates

Helping businesses and households to save and invest

$45K

$40K

Avert a FISCAL CRISIS!

Growing Debt Declining Debt

Source: Congressional Budget Office, Long-Term Outlook 2012.

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Debt Reduction and Economic Growth

Real Output Growth (Percent)
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 CBO Baseline Growth Medium Output Effect Small Output Effect Large Output Effect

CBO studied the economic impact of an illustrative $2.4 trillion debt reduction plan and found that real output would be between 0.6% and 1.4% higher, depending on the magnitude of the effects.

*Estimates from CBO, The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit.
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How to Reduce the Deficit

Domestic Discretionary Cuts
Defense Spending Cuts Health Care Cost Containment Social Security Reform Other Spending Cuts

Tax Reform and Tax Expenditure

Cuts

Budget Process Reform

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Go Small: Lots of Pain for Little Gain

A smaller package would offer some
improvement to our fiscal situation, but it would not offer the benefits of a declining debt path

The public would see a package of tough

choices and a debt burden that continues to grow. In essence, it would deliver political pain with not so much gain

Would leave in place considerable policy

uncertainty, affecting businesses and markets

A smaller package and an incremental

approach to debt reduction would not offer the political tradeoffs necessary to solve our fiscal challenges

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What Could Go Small Look Like?

Possible Policy Changes

Savings

Without addressing
health care reforms or revenues, it will be very difficult to achieve significant savings

Government-Wide
Discretionary Health Care Other Mandatory Social Security Revenues Net Interest Total

$250 billion from chained CPI

$100-200 billion from modestly slower growth in BCA caps Negligible savings $150-250 billion from farm subsidies, federal civilian and military retirement and benefits, Fannie and Freddie, and others Negligible savings Negligible savings $100 billion $600-800 billion

And even then, there is

no guarantee that significant savings in other areas of the budget could be agreed on

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Adding Serious Entitlement Reforms and Revenues Pushes You into Go Big
Democrats will only agree to serious entitlement reforms if there are revenues Republicans will only agree to revenues in the context of comprehensive tax reform Democrats will only agree to a comprehensive tax reform that replaces the Bush tax cuts if it raises at least the $800 billion they would get if President Obama vetoes extension of upper income tax cuts Republicans will not agree to revenues anywhere near that amount without health savings that go beyond the amount proposed by the President
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Advantages of Go Big
Debt stabilized and falling as a share of
the economy later in the decade, and all the benefits associated with a declining debt burden:
Less crowding out of private sector

investment Stronger confidence in businesses and markets Greater certainty and stability Stronger economy over the long-term Lower interest payments and increased fiscal space Intergenerational equity Reduced or eliminated risk of fiscal crisis

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Advantages of Go Big (contd)

Increased chances of enacting a
comprehensive debt solution of at least $3 - $4 trillion in savings:
Political trade offs necessary to address
entitlement growth and revenues Shared sacrifice in Go Big approach Realize the gains of debt reduction by stabilizing and reducing the debt, and not just making difficult decisions that solve only part of the problem

Restore Americas faith in the political

system

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The Announcement Effect

Just announcing the adoption of a debt reduction
plan can provide a boost in confidence, aiding the economic recovery today

Businesses and investors frequently cite the

uncertainty over if and how the U.S. might control its debt trajectory when holding back on investment

Prominent lawmakers, government officials,

economists, and experts have reiterated the benefits of the announcement effect, including:

Ben Bernanke, Fed Chairman The International Monetary Fund Glenn Hubbard, former Chair of the Presidents CEA Mark Zandi, Chief Economist, Moodys Analytics Michael Bloomberg, Mayor of New York City Alan Blinder, former Fed Vice Chairman Larry Summers, former Director, NEC

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Note: For more information on the announcement effect, see CRFB at http://crfb.org/blogs/announcing-announcement-effect-club

Go Big: Shared Sacrifice

Expanding the size and scope of a package can promote a sense of shared
sacrifice on behalf of the American public and key interest groups, making it more likely that they would accept changes if everyone was contributing to the solution.

An incremental approach would allow advocates for parts of the budget to argue
that they are bearing an unfair burden. A Go Big approach which achieves savings in all parts of the budget neutralizes that argument.

In a Washington Post op-ed, Fiscal Commission co-chairs Erskine Bowles and Alan
Simpson highlighted this lesson from the Fiscal Commission deliberations: The more comprehensive we made it, the easier our job became. The tougher our proposal, the more people came aboard. Commission members were willing to take on their sacred cows and fight special interests but only if they saw others doing the same and if what they were voting for solved the countrys problems.

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The Bowles-Simpson Fiscal Commission Plan

Discretionary Spending
Cuts to defense and non-defense programs,
totaling an additional $400 billion over ten years [on top of the savings already enacted].

Social Security
Progressive benefit changes, retirement
age increase, tax increase for high earners totaling $300 billion.

Health Care Spending

Cuts to providers, lawyers, drug companies, &
beneficiaries totaling $400 billion.

Other Mandatory Programs

Reforms to farm, civilian/military retirement, &
other programs saving $290 billion.

Tax Reform and Revenue

Comprehensive reform to lower tax rates,
broaden the base, and raise $1.2 trillion.
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Is There a Smart Path Forward?

Deficit Projections as a Percent of GDP
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Current Law (CBO) Alternative Fiscal Scenario 9CBO) Illustrative Plan

Note: Illustrative plan loosely based on Fiscal Commission savings. Current policy based on CRFB Realistic Baseline.
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Illustrative Tax Rates

2012 Rates, Expiration of the Tax Cuts, and Fiscal Commissions Illustrative Plan
Corporate Rate 35% 35% 26%

Bottom Rates Current Rates for 2012 Scheduled Rates for 2013 Eliminate All Tax Expenditures Keep Child Tax Credit and EITC Fiscal Commissions Illustrative Tax Plan 10% 15% 8% 15%

Middle Rates 25% 28% 14% 28% 31%

Top Rates 33% 36% 23% 35% 39.6%

9% 12%

15% 22%

24% 28%

26% 28%

Fiscal Commissions illustrative tax plan would reduce or eliminate most tax expenditures and use the savings to reduce tax rates and reduce the deficit.

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Whats in the Fiscal Cliff?

At the end of 2012, the following is scheduled to occur:

All of the 2001/2003/2010 tax cuts will expire at once The sequester will immediately cut defense by 10%, non-defense
discretionary by 8%, and other spending across-the-board The payroll tax holiday and extended unemployment benefits will expire The AMT will hit 30 million taxpayers instead of 4 million All the tax extenders will expire Physicians will see a 30% cut in their Medicare payments Tax increases from the Affordable Care Act will begin The country will once again hit the debt ceiling

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Components of the Fiscal Cliff

The Sequester
Enacted in the 2011 BCA to pressure the Super Committee to enact a
plan, the sequester would cut spending across the board in January 2013.
% Reduction in 2013 (Budget Authority)
Defense Spending Non-Defense Disc. Spending Medicare Other Non-Exempt Spending Interest Total Cuts 9.4% 8.2% 2% 7.6% N/A +$100 billion

2012-2022 Cuts (Budget Authority)

$550 billion $360 billion $125 billion $45 billion $170 billion $1,250 billion

Note: Defense reduction would be closer to 10% when compared to spending levels enacted last year, but war spending and unobligated balances on net push this percentage down. In reality, sequester cuts in all categories will be larger for 2013 given that they will be applied over nine months instead of a full fiscal year.
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Source: Congressional Budget Office and Office of Management and Budget. Numbers are rounded.

Components of the Fiscal Cliff

Other Policies Set to Activate or Expire
Jobs Measures
2% payroll tax holiday Extended duration for unemployment benefits

Annual Doc Fixes

Affordable Care Act Tax Increases

0.9% increase in HI tax for higher earners and applying the full 3.8% tax to net
investment income 2.3% tax on medical devices Other measures

Various Tax Extenders

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R&E tax credit Alcohol fuel tax credit Subpart F for active financing income Other extenders

How Big Is the Fiscal Cliff?

Policy 2001/2003/2010 Income and Estate Tax Cuts AMT Patches (w/ Tax Cut Interactions) 2013 Fiscal Impact $110 billion 2013-2022 Fiscal Impact $4.3trillion

$105 billion
$55 billion $10 billion $115 billion $30 billion $25 billion ~$450 billion ~3%

$1.7 trillion
$1.1 trillion $280 billion $150 billion $455 billion $420 billion $8.1 trillion N/A

Sequester Doc Fixes

Jobs Measures Various Tax Extenders Taxes from the Affordable Care Act Total Fiscal Impact Total Economic Impact (% GDP)

Note: Congressional Budget Office estimates and CRFB calculations. 2013-2022 estimates include interest.
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Budgetary and Economic Impact in 2013

Billions of Dollars

36% 64%

Source: Congressional Budget Office estimates and rough CRFB calculations.

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Short-Term Economic Impact of the Fiscal Cliff

Expiring/activating measures will create a fiscal shock of

about 4 percent of GDP, which could take about 2 percent out of the economy in the short-term and increase the unemployment rate by over 1 percentage point

CBO projects that the economic impact of the fiscal cliff

would send the economy into a double-dip recession next year

Source: Congressional Budget Office.

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Long-Term Economic Impact of the Fiscal Cliff

The Fiscal Cliff could improve the long-term, BUT:

Savings in the Fiscal Cliff will not deal with the long-term debt
drivers growing health and retirement costs

Revenue will come largely from higher marginal rates, which

will reduce incentives to work, save, and invest

Spending cuts will come from mindless across-the-board cuts

instead of cuts to low-priority and anti-growth spending

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Lawmakers Face a Fiscal Cliff and a Mountain of Debt

BAD CASE: A Fiscal Cliff
If lawmakers allow all policy expirations and the sequester to proceed as scheduled, the economy could take a 2 percent hit next year, while not addressing entitlement spending growth or fundamental tax reform

WORST CASE: A Mountain of Debt

If lawmakers waive or extend policies at the end of the year, they could add more than $8 trillion to the debt over the next ten years, compared to current law. Rising debt would reduce the size of the economy by about 1% later in the decade and by significantly more in future years

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Is There a Smart Path Forward?

Instead of a Fiscal Cliff or Mountain of Debt, we should enact a comprehensive and thoughtful plan which would:

Go Big
A plan must stabilize and reduce the debt relative to the economy A go big plan would make bipartisan compromise more likely by
allowing for the necessary tradeoffs

Go Smart
Replace mindless, abrupt deficit reduction with thoughtful changes
that reform the tax code and cut low-priority spending

Go Long
Enact gradual reforms that address the long-term costs of growing
entitlement spending

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Benefits of Replacing the Fiscal Cliff with a Go Big Plan

Achieves long-term growth without short-term contraction
Avoids both a double-dip recession and a potential
downgrade from credit rating agencies

Allows for sensible policy decisions to make the tax code

more competitive, reform entitlement programs, and eliminate wasteful spending

Reduces market and public uncertainty over future tax and

spending policies

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What Savings Have Lawmakers Enacted So Far?

(Billions of Dollars through 2021)
$2,500 $2,000 $1,500 $1,000 $500 $0

The bipartisan Simpson-Bowles Commission recommended more than $4 trillion in deficit reduction So far, policymakers have enacted $1.3 trillion in deficit reduction and $1 trillion in mindless across-the-board spending cuts

Simpson-Bowles Recommendations Enacted Savings

Note: Simpson-Bowles figures represent original recommendations, updated based on baseline changes in Cooper-LaTourette proposal. Estimates based off of realistic budget projections.
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Its Time for a Fiscal Reform Plan

Reasons to Enact a Plan Sooner Rather than Later
Size of Adjustment to Close 25-year Fiscal Gap, Depending on Start Year (Percent of GDP)

Allows for gradual phase in Improves generational fairness Gives taxpayers businesses, and
entitlement beneficiaries time to plan

2013

4.8%

2015

5.2%

Creates announcement effect

to improve growth

2020

6.8%

Reduces size of necessary

adjustment

2025 0% 2% 4% 6% 8%

9.7% 10% 12%

Source: Congressional Budget Office

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Its Time for a Fiscal Reform PlanNow

We Cant Wait Until After the Election
Every month and year that passes, the debt grows larger and larger and
the solutions become more difficult

Elections can take policy options off the table and back candidates into
positions that make bipartisan solutions more difficult

Addressing the fiscal situation as soon as possible would make

governing easier not harder after the election

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Who Supports Fixing the Debt?

Calls for a $4+ Trillion, Bipartisan Solution to the Debt
47 Members of the Senate 102 Members of the House of Representatives 200 Business Groups, including the Chamber of Commerce, National
Association of Manufacturers, and Business Roundtable

Other groups: Partnership for New York City, American Business

Conference, National Conference of State Legislatures

60+ former government officials, business leaders, and experts Editorial boards and other outside experts Over 170,000 concerned citizens

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Principles of Fiscal Responsibility

For the 2012 Campaign
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
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Make Deficit Reduction a Top Priority

Propose Specific Fiscal Targets Recommend Specific Policies to Achieve the Targets Do No Harm

Use Honest Numbers and Avoid Budget Gimmicks

Do Not Perpetuate Budget Myths Do Not Attack Someone Elses Plan Without Putting Forward an Alternative Refrain from Pledges That Take Policies Off the Table

Propose Specific Solution for Social Security, Health Programs, and the Tax Code
Offer Solutions for Temporary and Expiring Policies Encourage Congress to Come Up with a Budget Plan as Quickly as Possible Remain Open to Bipartisan Compromise

Note: Principles as taken from CRFBs U.S. BudgetWatch Project.

The Time For Action Is Now

If not addressed, burgeoning deficits will eventually lead to a fiscal crisis, at which point the bond markets will force decisions upon us. If we do not act soon to reassure the markets, the risk of a crisis will increase, and the options available to avert or remedy the crisis will both narrow and become more stringent.
- Erskine Bowles and Sen. Alan Simpson,
Former co-chairs of the National Commission on Fiscal Responsibility and Reform

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Useful Resources
The Committee for a Responsible Federal Budget http://crfb.org The Campaign to Fix the Debt http://www.fixthedebt.org Policy Papers: Between a Mountain of Debt and a Fiscal Cliff Primary Numbers: The GOP Candidates Going Big Could Improve the Chances of Success

Congressional Budget Office July 16, 2011 report: The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit

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